THE global economy is heading into a depression. The hastily cobbled together fiscal and monetary packages announced the world over to soften the economic impacts of coronavirus containment look impressive in their depth and breadth. But as ever in government schemes to aid the small business sector, the backbone of most economies, the devil is in the detail.
The UK government’s Coronavirus Business Interruption Loan Scheme (CBILS) is designed to provide small business owners in financial distress with access to up to five million pounds sterling in six-year term loans and asset finance or three-year overdrafts and invoice finance facilities. Loans are interest-free for borrowers for the first year (the government covers that); lenders under the scheme receive an 80% government guarantee on loan repayments.
The detail suggests that the CBILS will be much less effective because of what to some look like greedy bad-faith actions by some of the lenders operationalizing the scheme on behalf of state development agency the British Business Bank (BBB). Lenders are reported to be doing whatever they can to exploit the scheme to their own ends; twisting the conditions, exacting extortionate repayment terms, rejecting applications on spurious, unclear or plain wrong grounds and forcing eligible clients to take their own usurious business-as-usual lending products ahead of the government scheme.
The devil is the profiteering tendencies and self-serving interpretations of lenders under the scheme. Tendencies that will likely push many small business owners to declare bankruptcy before accepting financial ‘assistance’ under the arduous terms being offered; declare bankruptcy after being rejected for assistance at a critical time; or be forced into bankruptcy by reported interest rates that seem more akin to those of backstreet money-lenders just when cash flow for hundreds of thousands of businesses has stopped because of the government lockdown.
On March 26, the Bank of England cut base rates to 0.10% as part of a raft of monetary stimulus measures. Yet business owners have reportedly been offered CBIL or banks’ own loan facilities at rates of 12% to over 20%.
Another element is lenders demanding personal guarantees and security from directors of small businesses, such that if borrowers default on their CBIL facilities, the bank will enforce security – not on primary residences, which is forbidden – but on all other assets listed in security debentures. Lenders had initially demanded personal guarantees on CBILs between 25,000 and 100,000 pounds; and personal guarantees and security charges over borrowers’ assets for loans up to 250,000 pounds. Above that loans had to be property-backed; secured by a personal guarantee, a debenture and tangible security.
Following an outcry, lenders were forced to row back on this, agreeing not to demand personal guarantees as security for amounts below 250,000 pounds under CBILS. By taking security, lenders end up with zero risk. If borrowers can’t pay, lenders will unleash normal commercial recovery procedures and take security of assets. That’s their first line of attack. Only if there is a shortfall will lenders seek recompense under the 80% government guarantee.
The only risk exposure banks have across the entire CBIL scheme is on the 20% non-guaranteed portion of unsecured facilities under 250,000 pounds. The bulk of risk is borne by government (a.k.a. taxpayers) and business owners (a.k.a. taxpayers).
Banks clearly want to protect asset quality and keep delinquency rates low. But we’re in a crisis. Not only is government guaranteeing 80% of CBIL facilities to protect banks; regulators have in addition provided banks with forbearance on loan provisioning and capital adequacy rules to get them through this crisis. The banks should be providing a lot more reciprocity and forbearance to clients.
Why should banks run loan applications through their normal business lending criteria before considering CBILs? On its website, the BBB says: “if a lender can offer finance on normal commercial terms without making use of the scheme, it will do so”. [My italics]. By the time that’s been run through Barclays’ interpretation machine, that line becomes: “if we can offer finance on normal commercial terms without the need to make use of the scheme, we are obliged to do so”. [My italics]. National Westminster Bank, and Metro Bank say similar or identical things.
NatWest says: “you'll need to apply for one of our loan products using the normal application process … If you are not eligible to receive finance against our standard lending criteria, we will be able to consider your application under the CBIL scheme … If you don't have the security to get a conventional commercial loan, you can apply for an eligible loan with us under CBILS.”
HSBC’s CBILS factsheet throws in the curve ball of European state aid: “You are responsible for ensuring that you do not exceed the "200,000*4 euros" European Community State Aid maximum as a result of taking out a CBILS loan.” Its footnote 4 says: “Under the Business Interruption Payment rules, the maximum assistance that can be provided is 800,000 euros, with restrictions in certain sectors.” That clears that up then.
Under the ‘Viability’ heading on its CBIL explainer, Lloyds Bank says: “the business needs to demonstrate that it will be able to meet all its repayment obligations, including repayment of the proposed CBIL. The business needs to demonstrate that it has a viable business proposition, which will be assessed according to our lending criteria.”
Lloyds says it will consider CBIL “if the finance will help the business trade out of any short to medium term cash flow difficulties and; if the facility is granted the business should not go out of business in the short to medium term. Viability will be considered in relation to future trading expectations and business plans.” [My italics].
Am I missing something here? The scheme was created as an emergency facility to help small businesses laid low by the extraordinary measures being taken to slow the spread of the disease in the UK, which has shut down the economy. This should not be allowed to become a profit-generating opportunity for lenders.
In economic crises, banks have to play a critical transmission role. In light of the behaviour of lenders, the government should have drafted the rules of the scheme more carefully. Better still, officials should have used the business tax infrastructure to bypass the banks altogether to make payments directly to eligible businesses.